With an expiration of December 31, 2010, the ethanol tariff is in jeopardy, putting American energy security at risk.
As worldwide demand for energy increases, several countries are looking to play a bigger role in the production of ethanol. The United States currently leads global production of ethanol producing over 13 billion gallons per year, but that may not always be the case. Brazil is not far behind and other foreign sources like the European Union are also looking to play a bigger role.
But, could tariff-free ethanol from foreign countries hamper the continued growth of the domestic ethanol industry? With opponents asking to remove the U.S. ethanol industry’s most important policies, the American economy could feel the hit. These policies are designed to create and encourage growth of the marketplace, removing them would contradict America’s biggest goal today — energy security.
Two of these policies, the blender’s credit and ethanol tariff, are extremely important in the support of America’s goals. So what would happen if they disappeared?
CURRENT ETHANOL POLICY
First things first. Here is a rundown on the policies in place today.
The Renewable Fuels Standard (RFS), the ethanol tax credit and a tariff on imports of ethanol are three of the primary policies in support of ethanol.
On February 3, 2010, the U.S. Environmental Protection Agency (EPA) released its final rule for the expanded RFS. One result of RFS2 is that greenhouse gas emissions (GHG) of grain-based ethanol again meets the Energy Independence and Security Act of 2007 (EISA) requirement. All conventional biofuels must reduce GHGs by at least 20 percent.
In order for cellulosic ethanol to comply with the RFS2 reduction standards, it must reduce GHG emissions by 60 percent or more. In its findings, the EPA reported a GHG reduction of 130 percent in ethanol produced from corn cobs, POET’s cellulosic feedstock using POET’s biochemical process.
Additionally, the EPA determined that sugar-based ethanol will reduce GHG emissions by at least 61 percent compared to base gasoline allowing it to meet the definition of advanced biofuels. This could increase ethanol imports of sugar-based ethanol from countries like Brazil and decrease the demand for domestically produced grain-based ethanol.
Next, is the Volumetric Ethanol Excise Tax Credit (VEETC), also called the blender’s credit. This credit is currently 45 cents per gallon given to the blender. It was lowered from 51 cents per gallon as part of the 2008 Farm Bill. The bill also included a continuation of the tariff on ethanol imports set to expire at the end of 2010.
The ethanol tariff of 54 cents per gallon is applied to any ethanol imported into the United States. For the most part, Brazilian ethanol is subject to the tariff as Brazil is the largest ethanol importer to the U.S. Through the ethanol tariff, our country decreases its dependence on foreign sources, building energy security.
WHY ARE THESE POLICIES IN PLACE?
Under World Trade Organization rules, the ethanol tax credit must be available to both domestic and foreign ethanol. Therefore, the ethanol tariff is designed as a way to recoup taxpayer dollars paid out to blend Brazilian ethanol. To put it another way, if we remove the ethanol tariff but keep the blender’s credit, we would, in essence, be subsidizing foreign ethanol.
“For years, the ethanol tariff has worked to offset the U.S. excise tax credit that applies to both domestically produced and imported ethanol,” said Senator Charles Grassley of Iowa. “If we were to lift the tariff, we’d in effect be giving the benefits of the tax credit to Brazilian ethanol producers. I don’t see any reason why we should be subsidizing the production of ethanol in Brazil.”
Grassley, a champion of the U.S. ethanol industry, joins others in support of the tariff. They contend that it is integral to the continued growth of the ethanol industry and the removal of the policy will have far-reaching consequences. However, many others are not in support and have publicly called for the removal of the tariff. Those opposed contend that the United States unfairly blocks foreign ethanol from entering our market and are lobbying to have the tariff removed.
WHAT WOULD HAPPEN IF THE TARIFF WAS REMOVED?
According to a report, “Removal of Ethanol Import Tariff,” by IHS Global Insight, should the tariff be removed, the demand for ethanol would be met by lower-priced imports of sugar-based ethanol from Brazil. Ultimately, this would result in a decline of domestic ethanol, lowering the price of corn and reducing jobs. While the losses would be most severe in 2012, they would continue beyond 2020.
Job losses in the U.S. would be substantial. There would be 161,284 jobs lost across all sectors in 2012, and continue through 2020 when 77,975 jobs would disappear. These losses would result in drastic ongoing employment issues in agriculture and related sectors and also result in a lower per bushel price of corn.
That’s not all. As the production of corn changes the land used for soybeans, wheat, soghum and barley, the commodity value is also adversely affected to the tune of $18 billion dollars during the first three years. Losses would taper off around $12 billion per year according to the report, “State-Level Economic Impacts of Removing the Ethanol Import Tariff,” authored by Dr. Dennis P. Robinson with the University of Missouri’s Community Policy Center. As commodity prices falter, the agriculture industry, namely the 28 corn producing states, would lose billions of dollars annually with farmers hurt most in Illinois, Iowa, Indiana, Nebraska, Minnesota and South Dakota.
When Minnesota Congressman and House Agriculture Committee Chair Collin Peterson was asked about the consequences of removing the tariff he replied, “I’m not sure we want to find out the answer to that. I would hope that some of my colleagues in Congress who want to do away with the tariff would realize that this isn’t about blocking trade or keeping out Brazilian ethanol. It’s about supporting domestic energy production and protecting the interests of the American taxpayer by not subsidizing ethanol from other countries that has already been subsidized by their governments.”
According to Rob Skjonsberg, Senior Vice President of Government Affairs for Sioux Falls-based POET, reducing or eliminating the tariff is essentially a tax break for a foreign country.
“That’s an outrageous concept considering our country’s economic condition,” said Skjonsberg. “Removing the tariff may be nice political rhetoric to some, but it’s not supported by sound arguments.” Should the tariff be rescinded beginning in 2011, the IHS Global Insight report predicts that imports would increase from the 300-400 million gallons per year today to more than 1.6 billion gallons per year from 2012-2014, then gradually decline to around 1.4 billion gallons per year through 2019. This would increase again beginning in 2020 in response to the assumed increase in the regulatory cap to 30 percent.
At the same time imports are increasing, the price of domestic ethanol is expected to decrease 8 cents per gallon in 2011 peaking at 32 cents per gallon in 2013 according to the report, “State-Level Economic Impacts of Removing the Ethanol Import Tariff.” This scenario would result in the loss of billions of dollars per year associated with domestic ethanol production while at the same time creating a new dependence for our nation.
“It doesn’t make sense – from a national security standpoint – to trade our dependence on Middle Eastern oil for a dependence on foreign ethanol,” said Skjonsberg. “America can produce her own safe, renewable ethanol. We shouldn’t depend on others.”
Skjonsberg and Grassley are not alone in their support of programs that support economic and job growth.
Peterson explained that the tariff keeps domestic producers on an equal footing with subsidized foreign producers and helps to ensure that all ethanol blended in the U.S. is treated the same no matter where it was produced.
“Because of this, our domestic ethanol industry has been able to create hundreds of thousands of American jobs, while over time growing from domestic annual production in the millions of gallons to almost nine billion gallons in 2009,” said Peterson.
BEYOND THE OBVIOUS
There are also consequences of removing the tariff that aren’t often discussed including international trade, foreign labor and production standards.
Many companies operating in foreign countries do so for cheap labor and provide poor working conditions and no health or economic benefits for its employees. In addition, many countries do not regulate environmental issues as strongly as in America. So the ethanol that could be imported into the U.S., which is produced in an environmentally sustainable way in the States, may come at the expense of increased pollution elsewhere in the world.
Peterson believes that some groups want to give Brazil a free pass. “Some people who want to get rid of the tariff are well-meaning when it comes to trade, while others have an ideological agenda, but folks in both groups seem to want to give Brazil a free pass. And they want to do it without any regard for the incentives the Brazilian government already gives its producers, or all the labor and environmental issues surrounding production practices in Brazil — stuff that would never fl y here, that most people would be rightly concerned about. I’m talking here about burning cane fields, using child labor in those fields, and the absence of any real air and water quality standards for Brazil’s existing biorefineries.”
A REASON TO EXPAND PERMANENTLY
With the expiration of the tariff on December 31, 2010, the debate surrounding it is heating up.
“There are multiple reasons why the tariff makes sound policy sense and should be extended permanently,” explained Skjonsberg. “From an economic standpoint, the tariff simply offsets U.S. tax credits that would otherwise benefit a foreign product. If the tariff were removed, it wouldn’t replace a single drop of foreign oil – it would displace domestic ethanol. Removing the tariff would instantaneously result in a massive transfer of wealth and American capital. It would send ripples through the entire U.S. agriculture sector.”
“In addition to OPEC oil, American consumers would also become susceptible to volatile, foreign feedstocks and commodity prices. That’s a scary proposition since Americans haven’t forgotten $4.00 gas,” said Skjonsberg.
The removal of the ethanol tariff would also create a different kind of “energy dependence” for America. Each year, as the country moves closer to meeting the 36 billion gallons of biofuels by 2022 mandate as set in EISA, the country would need to look outside of its borders for the fuel — thus creating a dependence on yet another foreign source of energy — namely ethanol. This type of move would be even more ironic in that with current technology and feedstocks, our country can not only meet but exceed those numbers within its own borders.
“In my mind, the secondary tariff is serving its purpose by supporting our domestic ethanol industry, and that is important given some of the other policy issues the industry is facing at the moment, like the blend wall problem,” said Peterson. “One option for Congress to consider is to lower the tariff amount to match the blender’s tax credit of 45 cents per gallon. However, such a move would come at a cost, since there would be less revenue coming into the U.S. Treasury if this were done.”
Peterson recommends following aspects of the Brazilian model, encouraging people to use biofuels. “They have put the infrastructure in place to support a domestic ethanol industry so that a very high percentage of their vehicle fleet is already flex-fuel. Because of this, Brazil can use ethanol blends in higher levels than we can, avoiding the blend wall problem ethanol organizations have spent valuable time and money trying to solve. If we had gone down that same road, we wouldn’t even be having a debate over E15.”
Ultimately, the ethanol tariff is an important element that keeps the domestic ethanol industry on the same playing field as foreign producers. Without it, we would again be pushing our nation into a dependence on another source of energy.
“U.S. ethanol’s market access is limited by our own government,” Skjonsberg says. “That’s why we have a blend wall. As long as those arbitrary barriers to entry exist and foreign ethanol – like cane from Brazil – receives preferential treatment, policies like the tariff will remain critically important and economically justified.”
Taking a Stand
Last year, when President Barack Obama’s nominee for Ambassador to Brazil, Thomas Shannon, publicly announced that the removal of the tariff would be “benefi cial” Senator Charles Grassley of Iowa quickly jumped into action in support of the domestic ethanol industry and American taxpayers.
In his response to the issue, he sent a statement to reporters and editors across the country that included a letter to U.S. Trade Representative Ron Kirk and Secretary of State Hillary Clinton.
Grassley wrote, “Mr. Shannon’s stance on the ethanol tariff is at variance with that of Congress. The ethanol tariff was extended by Congress in 2008. Just one year earlier, in 2007, the Senate soundly rejected an amendment to remove the ethanol tariff. In maintaining and extending the tariff, Congress has recognized the important role that the tariff plays in reducing U.S. dependence on foreign energy sources.” Grassley also noted in his letter that Brazil already has the opportunity to import ethanol tariff-free to the United States through Caribbean countries as part of a trade program called the Caribbean Basin Economic Recovery Act (CBERA). This act was originally put into place in 1983 to encourage economic development in the Andean (Peru, Bolivia, Columbia and Ecuador) and Caribbean regions, and assigns an ad valorem import duty of 2.5 percent. This is, in fact, one of the lowest in the world — Brazil, the European Union and Japan all have much higher import duties. There is a cap, however, that limits the amount of ethanol that can be imported into the country duty-free and to date Brazil has never come close to meeting this cap.
“Under the Caribbean Basin Initiative, ethanol produced in other countries that is merely dehydrated in a Caribbean country can enter the United States duty-free up to 7 percent of the U.S. ethanol market. Moreover, this duty-free access, as it captures 7 percent of U.S. ethanol consumption, grows every year,” explained Grassley. “But this 7 percent cap has never been fi lled. In fact, it was fi lled only 25 percent in 2009. Given that Brazil and other countries have yet to take full advantage of their existing opportunity to ship ethanol duty-free to the United States, I fail to see why we should make our tariff treatment of imported ethanol even more generous.”
While Grassley is opposed to eliminating the tariff, he does acknowledge the importance of CBERA.
“I understand why the Caribbean Basin Initiative carve-out is in place. It helps to create jobs in the beleaguered, low income countries to our immediate south.”